Theta decay overnight

A

ashkelon

Hi,

Does theta decay occur overnight? If so, generally speaking, how much does this impact the overall daily decay? I know theta is a mathematical model and not a mechanical formula that can be applied in real-world. But, in general, how does overnight theta decay contribute to overall theta decay, all things being equal? I've read different answers, that it theoretically doesn't, and that it theoretically does, but I have not seen anyone anywhere try to define more precisely how post/pre-market theta generally contributes to overall theta...

E.g. if theta is -0.10 on a $1.00 option, theoretically this option will be worth $.90 in 24 hours, but if 16-18 of those hours are offmarket, generally, what % of that .10 occurs in the off-market?

Appreciate any insight, thanks.
 
ashkelon said:
Hi,

Does theta decay occur overnight? If so, generally speaking, how much does this impact the overall daily decay? I know theta is a mathematical model and not a mechanical formula that can be applied in real-world. But, in general, how does overnight theta decay contribute to overall theta decay, all things being equal? I've read different answers, that it theoretically doesn't, and that it theoretically does, but I have not seen anyone anywhere try to define more precisely how post/pre-market theta generally contributes to overall theta...

E.g. if theta is -0.10 on a $1.00 option, theoretically this option will be worth $.90 in 24 hours, but if 16-18 of those hours are offmarket, generally, what % of that .10 occurs in the off-market?

Appreciate any insight, thanks.
More...
Imagine if options did not decrease over night. An investor could buy a straddle at 3:59 EST and close the position at 9:30 the next morning for no theta risk but get exposure to long gamma. If this were the case, everybody would be doing it which would push the option prices up.

Different regimes will price over night gamma differently. For example when SPX is having large over night gaps, there will/should be more decay over night. Think about right before an earnings event, 90% of the next days premium is lost over night.

You can certainly estimate overnight option decay but is it really worth it when most of your pnl is going to be driven by delta/vega?
For a 10 day option on SPY a 1% change in IV will impact the price more than a whole day worth of theta.
Screen Shot 2019-11-15 at 1.31.57 AM.png
 
TheBigShort said:
Different regimes will price over night gamma differently. For example when SPX is having large over night gaps, there will/should be more decay over night. Think about right before an earnings event, 90% of the next days premium is lost over night.

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More...

"Imagine if options did not decrease over night. An investor could buy a straddle at 3:59 EST and close the position at 9:30 the next morning for no theta risk but get exposure to long gamma. If this were the case, everybody would be doing it which would push the option prices up."

Yes, that lines up with what I read as well.


"You can certainly estimate overnight option decay but is it really worth it when most of your pnl is going to be driven by delta/vega?
For a 10 day option on SPY a 1% change in IV will impact the price more than a whole day worth of theta."

How can one estimate overnight option decay? Can I ask where you found this calculator, and do you have information on how to use it?

Also, I understand that the ratio that theta decay impacts overall price vs other greeks changes as we near DTE. As I am planning to trade weeklies at 0-2 DTE, theta decay is relatively more significant. If I hold a position overnight which expires next day (I don't plan to do this often, but in case of extenuating circumstances it happens), I'd like to be able to incorporate this risk into the calculation of what I am looking for in holding overnight, all other things being equal. Hope that makes sense.
 
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